1. What is APY?

APY (Annual Percentage Yield) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, APY considers that interest is earned on previously accumulated interest.

2. How Does the Calculator Work?

The calculator uses the APY formula:

Where:

• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of compounding periods per year

Explanation: The formula shows how more frequent compounding leads to higher effective yields, as interest is earned on interest more often.

3. Importance of APY Calculation

Details: APY allows for accurate comparison between different savings accounts or investment products with varying compounding frequencies. It shows the true earning potential of your money.

4. Using the Calculator

Tips: Enter the annual interest rate as a percentage (e.g., 2.5 for 2.5%) and the number of times interest is compounded per year (e.g., 12 for monthly compounding). All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between APR and APY?
A: APR (Annual Percentage Rate) doesn't account for compounding, while APY does. APY gives a more accurate picture of your actual earnings.

Q2: How does compounding frequency affect APY?
A: More frequent compounding (daily vs. monthly) results in higher APY, as interest is calculated on accumulated interest more often.

Q3: What's a good APY for savings accounts?
A: As of 2024, high-yield savings accounts typically offer APYs between 3-5%, significantly higher than traditional savings accounts.

Q4: Does APY account for fees?
A: No, APY only reflects the interest earnings. Account fees would reduce your actual returns.

Q5: Is APY the same as annual return?
A: For savings accounts, yes. For investments with variable returns, APY represents a projected yield based on current rates.